Sterling hits 16-month against dollar

Sterling gained against the dollar by around 0.4% yesterday as dollar sentiment was still bearish due to prospects of Moody’s readjusting the US credit rating. GBP is still making gains against the dollar this morning, currently hitting a 16-month high.

However, in spite of this, sterling suffered loses against most currencies yesterday as the minutes from April’s monetary policy committee showed no change in the voting pattern. Sterling shed 1% against a basket of 10 other currencies, and against the euro the pound closed down by around 1%.

The MPC minutes released yesterday showed that Andrew Sentence maintained his call for a rise to 1.0%, while Martin Weale and Spencer Dale pushed for a hike to 0.75%. These minutes were generally viewed as dovish as Andrew Sentence is coming close to the end of his time on the committee. An unexpected fall in the annual inflation data from 4.4% to 4.0% and a decline in the levels of government debt seem to have set an agenda for trying to maintain economic growth rather than controlling inflation. The interest rate futures markets are now imply an expectation that UK interest rates will go up by 0.25% in November.

The main focus today in terms of UK data will be on public sector net borrowing, expected to be at 18.8 billion versus the previous figure of 10.3billion, and UK month on month retail sales, expected to come in at -0.5% versus last month’s fall of -0.8%.

EUR

Yesterday, despite a lack of economic data, the euro was able to capitalise on both weakness in sterling and against the dollar. Despite continued sovereign debt issues, the euro has managed to maintain buoyancy due to the bullish stance the ECB has taken on monetary policy. Against the pound, expectations that the European Central Bank will remain decisive in tackling inflation through raising interest rates were in contrast to the Bank of England’s static stance towards leaving them on hold. The euro was able to gain around 1% on the day. Against the dollar the euro gained around a cent as it closed the day up by around 0.6%.

Today there is again very little European economic data out with the main focus being on German IFO business climate data, a leading indicator of the levels of German Business activity. This is expected to show a slight dip from the previous reading of 111.1 to 110.6.

USD

The dollar has been generally weakened by this weeks’ main headline that Moody’s may have to lower US credit ratings due to Obama’s tax and unemployment benefits package. This package is likely to push up government debt levels, and is viewed as generally negative threat to US economic sentiment. As a result the dollar was broadly weak yesterday falling by 0.4% on the day against the pound and by around 0.6% against the euro.

The main US based data released today will be firstly the US jobless claims data at 13:00. This is expected to see unemployment claims drop to 394k from last month’s figure of 412k. The other main number will be Philly Fed manufacturing index, expected to be down at 37.1 vs last month’s figure of 43.4.